Renting to parents

This is sort of a follow on to a previous thread I started (in money matters - "please help settle a family argument". I can't add the link but feel free to add it).

However that's quite a long thread so I will put the key points here so you don't need to read it.

We own a property with a large unconverted annex. The plan is for my PILs to live there for the rest of their lives and that was the plan when we bought it. Due to the additional cost of the property to provide the annex and the length of time they are expected to live there (say 20 years) we expect a contribution. This has caused some issues with bil. Following discussion on the previous thread our preferred option is now for PILs to lend us the money to undertake the conversion ( interest free in exchange for them choosing design / specification) and then for us to charge them rent (at the low end of market rent?). In practical terms the rent would offset the loan until it's repaid and then rent would be paid to us thereafter.

We will get legal advice but it would be helpful to get an idea of what legal / tax issues we would face. Eg would we need to declare rent as income or from tax point of view is it a gift between family members.